Delphi plan's bonus cuts may put a damper on New York filings, experts say

By Rebecca Melvin

New York, Jan. 23 - A New York bankruptcy judge's decision to give provisional approval to Delphi Corp.'s reorganization plan pending cuts to its executive bonus plan is considered unlikely to set much of a pattern for future bankruptcy cases but may discouraging companies from filing their cases in New York, according to two professors.

"The cuts are highly unusual, but not highly significant," said Lynn LoPucki, a law professor at the University of California, Los Angeles. "A cut of this size will be shocking to corporate executives, and as a consequence companies will no longer file in New York; they'll go to Delaware."

Judge Robert D. Drain of the U.S. Bankruptcy Court for the Southern District of New York Tuesday slashed the cash emergence award for executives under the Delphi reorganization plan to $16.5 million from a proposed $87 million.

In addition to the $87 million, Delphi's top two executives Robert S. "Steve" Miller and Rodney O'Neal were supposed to have received a combined cash reward of $13.6 million upon emergence. But now all the bonuses including theirs must be paid from the $16.5 million.

LoPucki, who has written about what he sees as competition between Delaware and New York to attract large bankruptcy cases, said Drain's decision will reinforce a trend that has more and more insolvent companies filing at the U.S. Bankruptcy Court for the District of Delaware.

Finance professor Edward I. Altman of the Leonard N. Stern School of Business in New York said the amount of the cash award was excessive.

"Nobody knows what the right amount of salary is for executives at that level, but $87 million sounds excessive," Altman said.

Although Altman said the Delphi ruling isn't an isolated case, and not only bonuses to management but also fees to lawyers have been known to be cut in bankruptcy cases, he didn't agree with LoPucki that there wouldn't be a ripple effect from the ruling.

There are societal and political winds blowing to curb what are seen as excesses in executive compensation. Altman said the danger is that more rulings such as these will hamper good management.

"The risk of contagion is there, and that carries the risk that it will be harder to attract and retain someone like Miller. He might not want to do it again [after this]," he said.

Altman also concurred that more bankruptcy cases may go to Delaware as a result. But the trend was already in that direction. Ten of 13 large public company bankruptcy cases last year were filed in Delaware, with only one notably large case - the Bally case - going to New York, LoPucki said.

Bally Total Fitness Corp., a Chicago-based fitness center operator, filed for bankruptcy on July 31 in the U.S. Bankruptcy Court for the Southern District of New York.

Changes in bankruptcy law were implemented in 2005 that were essentially aimed at putting curbs on abuses of bankruptcy protection filings. One such curb was that companies are no longer allowed to pay retention bonuses, but in subsequent decisions bankruptcy judges have approved other types of bonuses. LoPucki said.

"The system is set up in such a way that very last judge would have to join in the trend in order for it to be effective in curbing huge executive payouts. As it stands the executives have complete power because they can take their case to any one of 200 different courts in the U.S. and the case will stay there," he said.

Delphi filed its bankruptcy case in October 2005 just prior to the Oct. 19 date on which the new bankruptcy rules went into effect.

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